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Global Credit Research - 14 Jul 2010
Approximately $2.8 bn of securities affected.
New York, July 14, 2010 -- Moody's Investors Service today affirmed the senior unsecured ratings
of AvalonBay Communities, Inc. at Baa1. The rating
outlook is stable. AvalonBay has successfully withstood the dual
pressures of the recession and the credit crunch by maintaining ample
liquidity at all times and scaling down its operations in the weakened
economy. We anticipate the REIT to be able to capitalize successfully
on the nascent recovery.
The Baa1 rating continues to reflect the apartment REIT's Class
A portfolio in high-barrier-to-entry markets,
its stable performance during the trough part of the cycle, as well
as excellent liquidity. Moody's believes that all of AvalonBay's
markets benefit from favorable supply/demand dynamics as outlined in Moody's
1Q 2010 Red-Yellow-Green report and are expected to recover
ahead of the broader market place. Positively, the REIT maintained
strong occupancy in the mid-90% range throughout the recession,
although its effective rents have suffered as a result of weaker demand.
AvalonBay has also sharply curtailed its traditionally large development
pipeline starting approximately 50% of planned developments in
2008 and almost none in 2009. Although the REIT has recently announced
$600 million in new starts for 2010, Moody's anticipates
AvalonBay to be conservative in growing its development efforts in the
AvalonBay has maintained good capital markets access throughout the credit
crunch raising both secured and unsecured debt and equity in 2009.
Over the past year, the REIT has financed its operations,
including on-going development efforts, without drawing on
its $1 bn line of credit.
Counterbalancing these positives are AvalonBay's current weakened
credit metrics which are anticipated to persist for several quarters.
As of Q1'10, the REIT's fixed charge decreased to 2.3x
from 3.1x YOY and its net debt/EBITDA increased to 8.0x
from 7.2x YOY as a result of the reduced demand in the recessionary
economy. In addition, the REIT's secured debt increased
to 25.3% of gross assets from 17.8% YOY primarily
due to the $741 million facility with Freddie Mac originated in
April of 2009. While Moody's believes this to be a material
level of secured debt, we acknowledge that the transaction was an
efficient way to raise capital for AvalonBay during the credit crunch
and do not anticipate the REIT to originate additional secured debt in
the near term.
The stable rating outlook reflects Moody's expectation that the
REIT will benefit from the relative strength of its markets, as
well as the senior management's determination to strengthen AvalonBay's
credit profile. We further expect the REIT to maintain superior
liquidity and to manage its development platform prudently.
Upward rating movement would be contingent on substantial strengthening
in AvalonBay's credit metrics with fixed charge coverage close to
3.0x, net debt/EBITDA below 6x, and secured debt closer
to low-to-mid teens, all sustained for several quarters.
Moderate development growth and ample liquidity would also be required.
Negative rating pressure would be caused by failure to improve AvalonBay's
credit metrics from the current, cyclical trough levels of fixed
charge at 2.3x, net debt/EBITDA of 8.0x, and
secured debt of 25.3% over several quarters. A dramatic
rise in the development pipeline or a deterioration in the liquidity position
would also be viewed negatively.
The following ratings were affirmed with a stable outlook:
AvalonBay Communities, Inc. -- Senior unsecured
debt at Baa1, senior unsecured shelf at (P)Baa1, subordinate
shelf at (P)Baa2, preferred stock shelf at (P)Baa2.
Moody's last rating action with respect to AvalonBay was on March
20, 2008, when the rating was affirmed and the rating outlook
was revised to stable from positive.
AvalonBay Communities, Inc. [NYSE: AVB] is an
equity REIT that develops, redevelops, acquires and manages
apartment communities in high barrier-to-entry markets in
the United States. As of March 31, 2010, AvalonBay
had an ownership interest in 172 apartment communities containing 50,322
apartment homes in ten states and the District of Columbia, of which
seven communities were under construction and seven communities were under
The principal methodology used in rating AvalonBay Communities,
Inc. was the Rating Methodology for REITs and Other Commercial
Property Firms, published in January 2006 and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research and
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Asst Vice President - Analyst
Commercial Real Estate Finance
Moody's Investors Service
Commercial Real Estate Finance
Moody's Investors Service
Moody's affirms AvalonBay's ratings; senior unsecured at Baa1
No Related Data.
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